Mexico sugar deal hard to swallow for last U.S. candy cane maker

NEW YORK (Reuters) - For the last U.S.-based manufacturer of the red and white striped candy cane that is a ubiquitous North American holiday season treat, the sugar supply deal struck between Mexico and Washington is anything but sweet.

FILE PHOTO - A worker poses for a photo in front of sacks filled with sugar at Emiliano Zapata sugar mill in Zacatepec de Hidalgo, in Morelos state, Mexico on March 7, 2015. REUTERS/Edgard Garrido/File Photo

The competitors of Ohio-based Spangler Candy Co have, over the years, moved their plants south to Mexico and beyond to gain unfettered access to the cheaper sugar supplies there. That was part of a shift in manufacturing out of the United States that President Donald Trump has vowed to reverse.

Spangler’s Chief Executive Officer Kirk Vashaw has kept the candy cane industry alive in the United States at his plant in Ohio, where his firm churns out 200 million candy canes a year.

But the new sugar supply deal will make things tougher still for Spangler, as an agreed rise in the minimum price for Mexican sugar will drive up Spangler’s raw material cost.

“To be honest, I’m just very disappointed that the Trump administration didn’t do more to level the playing field, which is something they promised over and over again to do for the American worker,” Vashaw said in a phone interview with Reuters.

“This was an opportunity to do that, and they didn’t.”

The firm is one of a wide range of food producers, drinks makers and cereal manufacturers across the country that will see sugar input costs higher by about $1 billion above government support prices, according to the Sweetener Users Association.

Many of those companies, who oppose the government’s support for the sugar industry, will have to consider whether to pass that rise in costs on to consumers. The additional cost is a fraction of the value of the packaged food industry, estimated at around $373 billion in 2016, according to data provider Euromonitor International.

Food and beverage firms such as Hershey Co , General Mills Inc, J.M. Smucker Co, Mondelez International Inc will be impacted because they are all companies for which sugar is a key raw material.

Hershey said in a statement that it was aware the agreement had the potential to increase sugar prices in the long term. Both Hershey and Mondelez referred Reuters to the Sweeteners Users Association, which in a statement described the pact as a “stealth price increase.”

General Mills and Coca-Cola Co declined to comment. PepsiCo Inc, Dr Pepper Snapple Group Inc and Mars Inc did not respond to request for comment.

FILE PHOTO - Workers sit next to bags containing sugar at the San Francisco Ameca sugar factory in the town of Ameca, Jalisco, Mexico on February 18, 2011. REUTERS/Alejandro Acosta/File Photo

“This is putting America second,” said Jeanne Shaheen, a Democratic senator from New Hampshire, where Swiss chocolate maker Lindt & Sprüngli has its U.S. headquarters. “It’s a bad deal for American families and businesses that will raise costs for consumers and threaten jobs in sugar-using industries.”

Shaheen is a long-time critic of the sugar program and has pushed for changes.

U.S. sugar companies - which process beet and cane before selling it to food and beverage industries - got better terms out of the deal and yet will not be impacted by the price rise.

Refiners were insulated from the impact of the higher raw sugar price by a greater increase in the minimum prices for refined sugar in this week’s agreement, so will simply charge the companies and consumers that buy their sugar more.

The U.S. sugar industry had asked for better terms after complaining the previous deal with Mexico squeezed refinery margins and starved them of supplies.

COZY DEAL

The new deal revised the previous 2014 pact and aimed to end years of dispute between the two countries. Larger sugar refiners will benefit the most, as the new terms make it harder for smaller competitors to import sugar from Mexico, which is the top foreign sugar supplier to the United States.

That means the smaller sugar buyers will have to pay more for their supplies.

Access to the 11 million-tonne annual U.S. sugar market is coveted by sugar exporters as price of the sweetener in the world’s largest economy is higher than elsewhere. The market is protected by the government, prices are guaranteed and imports are rationed.

The combined impact of those measures means that U.S. sugar buyers will pay about 60 percent more than global benchmark prices.

For Spangler, which makes Dum Dum lollipops as well, the rise in prices for Mexican sugar will translate to an around 8 percent rise in what it pays, estimates Vashaw.

Spangler opened a plant in Juarez, Mexico, in the early 2000s and now produces a little over half its candy canes there.

“If it was all about money, we’d do it all in Mexico,” said Vashaw. “When your main cost driver just went up 8 percent and in Mexico it didn’t go up at all, it just makes any foreign confectionary supplier more cost competitive. That’s why a lot of companies moved out of the United States.”